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HP's CFO admits to never reading the due diligence on Autonomy

19th Jun 2019
HPE HQ
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HP's blockbuster civil suit against Autonomy's founder took a strange turn when its former CFO admitted she had not read any due diligence before the US software giant splurged $11bn on the acquisition.

Back in 2015, security expert Mikko Hyppönen set up a free WiFi hotspot in the heart of London’s financial district. Nestled in the fine print was a “Herod clause”: by accepting the terms and conditions, “the recipient agreed to assign their first born child to us for the duration of eternity”.

Six people signed up, according to Hyppönen.

His point was that our failure to read the small print could result in unpleasant consequences. We're all guilty of skimming the t&c's in our private lives. However, when you’re the well-remunerated CFO of a major corporation, due diligence is kind-of part of the deal.

No one apparently explained this to HP’s former CFO Cathie Lesjak. Back in 2011, HP was sizing up the acquisition of British software company Autonomy. Lesjak, understandably as CFO, played a key role in these efforts.

The acquisition went ahead and quickly turned disastrous. A year after HP paid $11.1bn (£8.5bn) for Autonomy, the US giant wrote down the value of Autonomy by $8.8bn. HP and its shareholders accused Autonomy of misleading them over the true value of the company; a claim that Autonomy’s founder Mike Lynch strenuously denies.

Years on and HPE’s blockbuster civil lawsuit against Lynch is finally proceeding. For clarity, HP was split into HPE and HP Inc. in 2015. HPE is the enterprise side of the split, focusing on servers, consulting and support, among other things.

Now, with the trial in full swing, old mistakes are coming to light. In a remarkable exchange with Lynch’s barrister, Lesjak admitted she received a preliminary due diligence report from KPMG, but she never read it.

Not only did she never read the preliminary due diligence, no further due diligence whatsoever went ahead after the report. According to The Register, KPMG’s report “was the only external due dil HP commissioned into Autonomy before the former went ahead with the mega-acquisition of the latter in August 2011”.

The Register has helpfully dug up KPMG’s due diligence report, which is available here.

Speaking to AccountingWEB, Clinton Lee, an M&A advisor and consultant at the Exit Firm, was surprised by Lesjak’s omission, labelling the situation “odd”. He added: “Normally, a company of HP’s size would, or should, have a whole team of 20 to 30 people working on the due diligence.”

The reports that stem from these efforts make their way up to board level for approval, Lee explained. “I suspect they had all the reports, but there was perhaps some board level pressure to make a decision in a certain way.”

Lesjak’s testimony yielded another clanger, too: the seasoned CFO said her finance team at HP had not actually calculated the precise losses that HP publicly attributed to Autonomy. In fact, according to HPE’s former CEO Meg Whitman, the firm never spoke with Lynch before going public about the situation.

HP’s former finance chief is not the only accountant caught up in the Autonomy debacle. Shushovan Hussain, Autonomy’s former CFO, was recently jailed for five years after being convicted for accounting fraud related to the acquisition.

Hussain’s misdeeds are a key part of HPE’s case against Lynch. In the two years preceding the Autonomy acquisition, the CFO was found guilty of using sophisticated accounting methods to falsely inflate Autonomy’s revenues to make it appear the business was growing when it was not.

US prosecutors have also charged Lynch and the former Autonomy vice president of finance Stephen Chamberlain. Lynch has denied criminal wrongdoing and Chamberlain has pleaded not guilty. Hussain’s lawyers have said they will appeal his sentence, and the civil trial in London’s High Court is ongoing.

Replies (8)

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By Brend201
20th Jun 2019 09:57

Yes, it's all about the big picture. Strategic thinkers. Maybe this is a chance for us nerdy, detail-focused people to highlight the importance of reading stuff. The devil is in the detail.

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By john hextall
20th Jun 2019 11:00

Well, I have just glanced through the due diligence report and have to admit it is pretty impenetrable. Not surprised she never read it. How much do KPMG get paid for this sort of thing?

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Francois
By Francois Badenhorst
20th Jun 2019 11:22

I parsed through it as well, and couldn't make head-nor-tail of it, really. I just assumed it was because I'm a dilettante. Nice to know it wasn't just me!

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Replying to Francois Badenhorst:
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By Brend201
21st Jun 2019 14:28

I had a quick look at it. I work in a small software company and the issues mentioned in the report make sense to me, possibly because the issues and jargon are relevant to such companies.

Separately, the lack of understanding of culture is noticeable and implies that KPMG UK weren't much involved. E.g. in the glossary, HMRC is given as "Her majesty's revenue and customs" (no caps after first word) but IRS is given as "Internal Revenue Service". Later, there is reference to "The HMRC". (I'm not British but even I know these things.)

And how could anyone have concluded that Autonomy was worth $10.3 billion?

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By dmmarler
20th Jun 2019 11:48

I've just flipped through the due diligence and would not suggest proceeding without better information - there are warnings all through it e.g. Key Findings 3, et seq. The document is a bit difficult, but it is inexcusable not to have read it thoroughly and not to have provided the Board with the CFO's initial comments at least, together with a copy. (It is possible this acquisition might have been someone's pet project, so whatever warnings were given would be ignored. There is still no excuse!)

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By kfh
20th Jun 2019 11:50

£8.5 Billion and no one appears to have read a initial DD report that sates quite clearly it has severe limitations that need to be addressed in the full report.
As has been said "Strategic thinking" appears to have ruled and if I got an impenetrable report I would have asked for it to be made understandable.

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By Ian Bee
21st Jun 2019 11:59

The first sentence of the letter states that KPMG's report is preliminary and subject to further work. And no more was done apparently.

I have always been suspicious of, unusually senior, people who say that they only look at the "big picture". Sometimes you need to understand the detail in depth in order to see a wider view.

In this case for example there is very little DD on tax as KPMG were not allowed access to the company's external advisers. At the very least you would want to know why as there might be a host of problems when you raise the bonnet, which in turn could affect other areas of the business.

Due diligence reports are by their nature, not easy to read and dull as ditchwater. But you're the client, if it's really impenetrable, ask for clarification or an executive summary. If you think that's expensive, see what it costs if you don't do proper due diligence.

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By john cottam
21st Jun 2019 15:20

How much was KPMG paid to produce a report that no-one read and no-one understood? If the report wasn't fit for purpose they should have engaged another firm. I only hope this CFO is not a member of my professional body

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